Nortel and Microsoft Form Strategic Alliance to Accelerate Transformation of Business Communications

REDMOND, WASH., and TORONTO–July 18, 2006–The convergence of the communications and IT industries took a significant step forward today as Microsoft Corp. and Nortel announced a strategic alliance based on a shared vision for unified communications. By engaging the companies at the technology, marketing and business levels, the alliance will allow both companies to drive new growth opportunities and has the potential to ultimately transform businesses communications, reducing costs and complexity and improving productivity for customers.

By combining Nortel’s world-class network quality and reliability with Microsoft® software’s ease of use, the alliance will accelerate the availability of unified communications — an industry concept that uses advanced technologies to break down today’s device- and network-centric silos of communication (such as e-mail, instant messaging, telephony and multimedia conferencing) and makes it easy and efficient for workers to reach colleagues, partners and customers with the devices and applications they use most.

Microsoft CEO Steve Ballmer (R) and Nortel President and CEO Mike Zafirovski today announced a strategic alliance between the two companies at Microsoft headquarters in Redmond, Wash.

Taking a decisive step further, Nortel and Microsoft will transition traditional business phone systems into software, with a Microsoft unified communications software platform and Nortel software products to provide further advanced telephony functionality. This software-centric approach will provide the easiest transition path for businesses, helping enable them to reduce the total cost of ownership and better protect current and future investments. It will also more quickly enable the creation of new, innovative applications.

“Nortel and Microsoft have each led fundamental transformations in their own market — Nortel’s digital innovation and Microsoft’s software on every desktop,” said Mike Zafirovski, president and CEO of Nortel. “By combining our unique strengths, Microsoft and Nortel will accelerate the delivery of unified communications — delivering to our customers a higher-quality user experience, with greater reliability and lower total cost of ownership. That’s where we can make a real difference.”

“We are investing together because the communications industry is at an inflection point,” said Steve Ballmer, CEO of Microsoft. “We will have deep collaboration in product development with Nortel, allowing us to rapidly deliver high-quality, highly reliable solutions that will support mission-critical communications. The opportunity for our customers is fantastic. We will enable them to realize tremendous economic and business benefits from unified communications.”

“This is a gutsy play for Nortel — accelerating the move of our voice technology into software and working with the world’s software leader as part of our broader business strategy to transform the company into a software and services leader,” Zafirovski said. “From this transaction, we believe we can capture well beyond $1 billion in new revenue, ramping up with increased momentum through 2009 via professional services, voice products and applications, as well as data pull-through in the enterprise.”

“Unified communications will drive the next major advance in individual, team and organizational productivity in today’s 24×7, always-connected and increasingly mobile work environment,” said Jeff Raikes, president of the Business Division at Microsoft. “Our software-based approach puts people at the center of communications through a single identity across e-mail, voice mail, voice over Internet protocol (VoIP) call processing, instant messaging and video, and intuitively embeds communications capabilities into people’s everyday work processes, including the Microsoft Office system and third-party software applications.”

Components of the Agreement

Strategic alliance

The companies will enter into a four-year alliance agreement, with provisions for its extension.

Microsoft and Nortel will jointly sell the advanced unified communications solution and integration services. The plan is to develop a training and incentive program for the companies’ sales teams.

Both companies will invest substantial resources in marketing, business development and delivery.

Microsoft and Nortel will build a joint channel ecosystem using both companies’ systems integrator, reseller, and service provider relationships.

The two companies will develop a series of compelling solutions for a range of customers, including small and medium-sized business, large corporations and service providers.

About Nortel

Nortel (NYSE/TSX “NT”) is a recognized leader in delivering communications capabilities that enhance the human experience, ignite and power global commerce, and secure and protect the world’s most critical information. Our next-generation technologies, for both service providers and enterprises, span access and core networks, support multimedia and business-critical applications, and help eliminate today’s barriers to efficiency, speed and performance by simplifying networks and connecting people with information. Nortel does business in more than 150 countries. For more information, visit Nortel on the Web at www.nortel.com. For the latest Nortel news, visit www.nortel.com/news.

About Microsoft

Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services and solutions that help people and businesses realize their full potential.

Certain statements in this press release may contain words such as “could,” “expects,” “may,” “anticipates,” “believes,” “intends,” “estimates,” ”targets,” “envisions,” “seeks” and other similar language and are considered forward-looking statements or information under applicable securities legislation. These statements are based on Nortel’s current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which Nortel operates. These statements are subject to important assumptions, risks and uncertainties, which are difficult to predict, and the actual outcome may be materially different. In preparation of its financial outlook in this press release, Nortel has made various assumptions related to its potential additional services revenues generated from its strategic alliance with Microsoft, including: a lack of new competitive technologies to displace or diminish the revenue potential of the joint unified communications solution; stable regional market dynamics for this solution, with the greatest revenue opportunities existing in North America and Europe; primary focus of future services revenues on integration and network monitoring, and a fixed market stable hourly service rate in 2007; Nortel capturing a significant amount of the revenue associated with the service and product revenue generated from any Converged Office deployment where Nortel is involved; successful evolution of Exchange Server and associated software from Microsoft to a unified messaging platform; ability to leverage Nortel’s existing installed base market and capture a significant amount of the IP conversion market for this installed base by 2009; significant growth in Nortel’s global sales in VoIP solutions year over year for the next four years, partially offset by a reduction in revenue per sale resulting from Nortel’s multipartner strategy; the continued success of Nortel evolving its technologies in a complementary fashion with its existing and future suppliers; and sustained dedication of the parties to grow aggressively this market opportunity. The above assumptions, although considered reasonable by Nortel at the date of this press release, may prove to be inaccurate, and consequently Nortel’s actual results could differ materially from its expectations set out in this press release.

Further, actual results or events could differ materially from those contemplated in forward-looking statements as a result of the following: (i) risks and uncertainties relating to Nortel’s restatements and related matters including Nortel’s most recent restatement and two previous restatements of its financial statements and related events; the negative impact on Nortel and NNL of their most recent restatement and delay in filing their financial statements and related periodic reports; legal judgments, fines, penalties or settlements, or any substantial regulatory fines or other penalties or sanctions, related to the ongoing regulatory and criminal investigations of Nortel in the U.S. and Canada; any significant pending civil litigation actions not encompassed by Nortel’s proposed class action settlement; any substantial cash payment and/or significant dilution of Nortel’s existing equity positions resulting from the finalization and approval of its proposed class action settlement, or if such proposed class action settlement is not finalized, any larger settlements or awards of damages in respect of such class actions; any unsuccessful remediation of Nortel’s material weaknesses in internal control over financial reporting resulting in an inability to report Nortel’s results of operations and financial condition accurately and in a timely manner; the time required to implement Nortel’s remedial measures; Nortel’s inability to access, in its current form, its shelf registration filed with the United States Securities and Exchange Commission (SEC), and Nortel’s below-investment-grade credit rating and any further adverse effect on its credit rating due to Nortel’s restatements of its financial statements; any adverse affect on Nortel’s business and market price of its publicly traded securities arising from continuing negative publicity related to Nortel’s restatements; Nortel’s potential inability to attract or retain the personnel necessary to achieve its business objectives; any breach by Nortel of the continued listing requirements of the NYSE or TSX causing the NYSE and/or the TSX to commence suspension or delisting procedures; (ii) risks and uncertainties relating to Nortel’s business including yearly and quarterly fluctuations of Nortel’s operating results; reduced demand and pricing pressures for its products due to global economic conditions, significant competition, competitive pricing practice, cautious capital spending by customers, increased industry consolidation, rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles, and other trends and industry characteristics affecting the telecommunications industry; the sufficiency of the restructuring actions announced in this press release, including the potential for higher actual costs to be incurred in connection with restructuring actions compared to the estimated costs of such actions and the ability to achieve the targeted cost savings and reductions of Nortel’s unfunded pension liability deficit; any material and adverse affects on Nortel’s performance if its expectations regarding market demand for particular products prove to be wrong or because of certain barriers in its efforts to expand internationally; any reduction in Nortel’s operating results and any related volatility in the market price of its publicly traded securities arising from any decline in its gross margin, or fluctuations in foreign currency exchange rates; any negative developments associated with Nortel’s supply contract and contract manufacturing agreements including as a result of using a sole supplier for key optical networking solutions components, and any defects or errors in Nortel’s current or planned products; any negative impact to Nortel of its failure to achieve its business transformation objectives; additional valuation allowances for all or a portion of its deferred tax assets; Nortel’s failure to protect its intellectual property rights, or any adverse judgments or settlements arising out of disputes regarding intellectual property; changes in regulation of the Internet and/or other aspects of the industry; Nortel’s failure to successfully operate or integrate its strategic acquisitions, or failure to consummate or succeed with its strategic alliances; any negative effect of Nortel’s failure to evolve adequately its financial and managerial control and reporting systems and processes, manage and grow its business, or create an effective risk management strategy; and (iii) risks and uncertainties relating to Nortel’s liquidity, financing arrangements and capital including the impact of Nortel’s most recent restatement and two previous restatements of its financial statements; any inability of Nortel to manage cash flow fluctuations to fund working capital requirements or achieve its business objectives in a timely manner or obtain additional sources of funding; high levels of debt, limitations on Nortel capitalizing on business opportunities because of credit facility covenants, or on obtaining additional secured debt pursuant to the provisions of indentures governing certain of Nortel’s public debt issues and the provisions of its credit facilities; any increase of restricted cash requirements for Nortel if it is unable to secure alternative support for obligations arising from certain normal course business activities, or any inability of Nortel’s subsidiaries to provide it with sufficient funding; any negative effect to Nortel of the need to make larger defined benefit plans contributions in the future or exposure to customer credit risks or inability of customers to fulfill payment obligations under customer financing arrangements; any negative impact on Nortel’s ability to make future acquisitions, raise capital, issue debt and retain employees arising from stock price volatility and further declines in the market price of Nortel’s publicly traded securities, or any future share consolidation resulting in a lower total market capitalization or adverse effect on the liquidity of Nortel’s common shares. For additional information with respect to certain of these and other factors, see Nortel’s 2005 10-K/A, Quarterly Report on Form 10-Q and other securities filings with the SEC. Unless otherwise required by applicable securities laws, Nortel disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Nortel is a registered trademark of Nortel Networks Ltd.

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